Gold has been on a remarkable run, recently hitting an all-time high driven by supply constraints and limited liquidity. However, the market now appears to be settling, and a short-term pullback seems likely. Looking ahead, there may be better value in owning gold closer to the $2,800 level in the coming weeks.

Market Normalization Signals a Pause

The recent dislocation in gold futures has started to normalize, easing some of the pressures that contributed to the surge. Key indicators suggest that:

• The funding structure for both gold and silver has reverted to normal.
• London gold is no longer in backwardation (a condition where spot prices are higher than futures prices, indicating immediate demand).
• The buildup of gold stocks in CME warehouses has plateaued.

With these changes, a critical arbitrage opportunity—the Exchange for Physical (EFP) trade—is no longer providing value. This may lead to metal leaving New York as traders seek better pricing elsewhere.

Swiss Refineries Shift Production Strategy

The end of the EFP arbitrage has influenced refinery behavior. Swiss refiners, who typically produce kilo bars suited for the Asian market, are now focusing on large bars—more suitable for the London market. This shift underscores a slowdown in physical demand from major buyers like China and India.

Demand from China and India Remains Subdued

While there are still physical gold inquiries from China, the Shanghai Gold Exchange price is holding only a small premium. To attract stronger demand, better value is needed.

Meanwhile, the Indian market remains stagnant. A recent trip to India confirmed that local jewelry demand is weak, with gold trading at a $25 discount to London prices. Both China and India, along with official sector buyers, are likely to re-enter the market once prices approach the $2,800 level.

Encouraging Signs from ETFs

One positive takeaway from the current landscape is the return of ETF demand. After a period of outflows, renewed investor interest in gold-backed exchange-traded funds suggests that longer-term sentiment remains constructive.

While gold remains a strong asset in the long run, a short-term pullback appears likely as supply pressures ease and major buyers wait for better pricing. The $2,800 level could be an attractive entry point, with demand from China, India, and the official sector expected to pick up at that stage. Until then, the market may see some consolidation before the next leg higher.